Multiple-Choice Questions
1. The key difference between residual income and EVA is that EVA
a. Uses the actual cost of capital for the company rather than a minimum required cost of capital.
b. Uses the minimum required cost of capital for a company rather than the actual percentage cost of capital.
c. Is a ratio rather than an absolute dollar amount.
d. Cannot be negative.
e. There is no difference between residual income and EVA.
2. Assume that a division has residual income of $ 6,500,000, operating income of $ 8,500,000, beginning operating assets of $ 45,000,000, and minimum rate of return requirement of 4 percent. What is the amount of the division’s ending operating assets?
a. $ 6,700,000
b. $ 45,000,000
c. $ 50,000,000
d. $ 55,000,000
e. Impossible to determine
3. Which of the following is a common transfer pricing policy?
a. Negotiated between buyer and seller
b. Cost based
c. Market based
d. All of these are correct
e. None of these are correct
4. HD Television is a multinational corporation that operates two divisions, A and B, in two different countries. Division A operates in a country with a 20 percent corporate tax rate while Division B operates in a country with a 40 percent corporate tax rate. Division A manufactures an electrical component that its sells to Division B, which in turn uses the electrical component to complete final construction of the televisions. Therefore, the internal sale between the two divisions requires that a transfer price be established. Which of the following transfer prices would result in the smallest after- tax profit for HD Television as a whole?
a. $ 26
b. $ 40
c. $ 33
d. $ 38
e. $ 44
5. Kellman Company shows the following unit costs for its product:
Direct materials ........ $ 40
Direct labor ........... 30
Variable overhead ....... 2
Fixed overhead ......... 5
Kellman started the year with 8,000 units in inventory, produced 50,000 units during the year, and sold 55,000 units. The value of ending inventory is
a. Greater under absorption costing than variable costing.
b. Greater under variable costing than absorption costing.
c. The same under both variable and absorption costing.
d. There is no ending inventory.
e. This situation cannot happen.
6. In a segmented income statement, which of the following statements is true?
a. Segment margin is greater than contribution margin.
b. Common fixed expenses must be allocated to each segment.
c. contribution margin is equal to sales less all variable and direct fixed expenses of a segment.
d. Segment margin is equal to contribution margin less direct fixed expenses.
e. Segment margin is equal to contribution margin less direct and common fixed expenses.
7. Which of the following is not a perspective of the Balanced Scorecard?
a. Learning and growth (infrastructure)
b. Internal business process
c. Customer
d. Nonfinancial
e. All of these are perspectives of the Balanced Scorecard.